A trade reference is a company with which a merchant does regular business, used as a means of verifying the creditworthiness of that merchant to a third party considering the extension of credit. The name and contact information of references are provided so that credit grantors can corroborate the account’s status. Trade references are typically obtained from a merchant’s credit application and reviewed when establishing a new customer or applicant.
It is traditionally a helpful practice to re-check references if an established customer begins to reveal signs of financial troubles or changes its payment or buying pattern. A regular check of trade references is highly recommended for customers that represent a significant portion of a merchant’s cash flow. Such periodic updates, rather than signifying the suspicion of any problem, indicates that a merchant firm cares about its financial exposure and takes care to monitor its leading accounts frequently.
Below is a checklist of questions that will be asked and information that will be looked at when references are provided by a merchant looking for credit.
- The first issue involves the actual number of references. It is traditional practice for a creditor, merchant service provider or bank to request a minimum of three trade references, something first encountered on a personal or business credit application. This has encouraged the average merchant customer looking for credit always to have their three best references close at hand when they apply for credit. Sometimes creditors do ask for more references, a request that is ultimately for their safety, of course.
- Creditors or merchant service providers distinguish between references that are primary or secondary suppliers to the applicant. On the whole, creditors usually provide preferential treatment to the primary suppliers on which a business depends. Of course, creditors usually pay them first, as well.
- Local suppliers to a merchant usually are paid first. A trade reference location helps define the payment practice of an applicant.
- Merchants are then asked the date when they opened. Merchants will be asked for trade references of those they have had trade deals for a one or more years.
- One thing creditors look for is whether the references given are related to the applicant in any way. They don’t want a reference that is biased.
- Another thing creditors consider are the references that were given to the firms now cited by the applicant as current references. When a creditor speaks to one or more of the references provided on the credit application, they ask for the trade references that were provided by the applicant when opening the account. They then contact those references, too. This will usually give creditors a more comprehensive insight into the payment patterns an applicant has.
- A credit grantor will also check for low and high credit amounts within the last year. The amount provided as high credit to the merchant applicant shows the amount of confidence that the supplier had in the applicant. The information and numbers may also be used to estimate and set a limit on any new credit granted to the merchant. When the amount of credit the applicant desires is much greater than the amount indicated by a trade reference, then the creditor usually moves ahead with caution, as the application may need more investigation.
- The “amount current” section is especially important if, in the middle of the peak season of the applicant’s business, the amount is somewhat low. This means that a creditor must also know the cycle of business of the applicant’s industry and individual operation to help the overall analysis.
- The “amount past due” query will “trend” any payment habits the merchant applicant may have and provide a creditor a rough “aging” analysis against the items listed below. Creditors also try to determine if the credit-seeker has any special terms with the references provided. Also, they seek to find out if the reference gives any special discounts. If so, then creditors determine if the applicant honors these discount arrangements or exploits them by accepting the discount and still paying late.
- The reference check may also involve looking at general payment patterns, and ask questions as to how the payment relationship has been in the time span of the merchant’s business relationship. “Satisfactory,” “not satisfactory” or “excellent” are some of the typical responses.
- The “length of time sold” is another consideration creditors seek to determine. This indicates the time span of the relationship between the reference and the merchant that creditors are investigating.
- It is crucial for creditors to understand if a merchant is a recurring customer of the trade reference given. It may very well be a one time deal, or a brief relationship that the supplier and applicant had.
- Many creditors look at the heading under which a merchant is listed in the “yellow pages” (online or printed) and subsequently contact others listed there to find out other information about the applicant and their business overall. This is of unique value if the merchant is from another region.
- Valuable information about the creditworthiness of the applicant can be obtained from credit groups or industry associations.
- If creditors plan to consider references above and beyond the ones provided on a credit application, it is important for the application to contain a clear disclaimer indicating that they reserve the right to verify the references provided on the credit application, as well as others that they discover in the course of the application process.
- Therefore, trade references greatly assist in analyzing an applicant. Trade references are a good way to oversee accounts in the course of the business journey with a credit-seeker. It largely depends on how creative one is in utilizing the helpful resources available, with a little digging, for credit analysis.